The Impacts of Divisia Money on MYR/USD Exchange Rate Determination

The unstable, money demand function over the recent decades may explain the unsatisfactory performance of the exchange rate model. Numerous studies have shown that Divisia money serves as a better variable for a stable money demand function. In this study, Divisia money is used as alternative money supply in MYR/USD exchange ratedetermination. This study finds that the Divisia money differential Granger causes MYR/USD exchange rate in the short-run. It is further found that a one percent increase in Divisia money differential will lead the exchange rate toappreciate by 27 percent. The major implication of this study is that policy makers could monitor MYR/USD exchangerate via the money supplies following the principle of Divisia monetary aggregate, which assigns higher weightage to more-frequently traded monetary assets.

کلیدواژه ها:

Exchange Rate ، Divisia Money ، Malaysia ، Bounds Testing